Veidekke — Audit Report / Information 2015

Sep 15, 2015

ECONOMIC OUTLOOK

Skøyen 15 September 2015 Rolf Albriktsen Kristoffer Eide Hoen

HIGHLIGHTS

• Norway: Slower growth ahead
• Moderate forecasts for building construction, high activity in civil engineering
• Increasing regional differences
• Sweden: High levels of activity in the markets
• Growth driven by residential buildings
• Denmark: Upturn in the economy
• The construction sector remains weak

Photo: Creative Commons/whiz-ka

THE ECONOMY

GLOBAL ECONOMY

GDP growth (%)	2014	2015	2016
Euro zone	0.8	1.5	1.7
Germany	1.6	1.6	1.7
United Kingdom	2.9	2.4	2.2
USA	2.4	2.5	3.0
China	7.4	6.8	6.3
Global	3.4	3.3	3.8

GDP GROWTH 2014–2016 HIGHLIGHTS

• Stock market turbulence and signs of weaker growth in China
• However, growth forecasts remain positive
• Commodity prices will remain low for some time
• Zero growth in the European construction and civil engineering sector in the last four quarters
• Wide differences between countries

INTERNATIONAL ECONOMIES

• Stock market turbulence and signs of weaker growth in China
• However, growth forecasts remain positive
• Commodity prices will remain low for some time
• Zero growth in the European construction sector in the last four quarters
• Wide differences between countries

MODERATE GROWTH IN THE NORWEGIAN ECONOMY

GROWTH FORECASTS FOR NORWAY HIGHLIGHTS

• A period of more moderate economic growth
• The GDP for mainland Norway is predicted to rise by roughly
  • 1–1.5% in 2015 and 2016
• Continuing low interest rates, with further cuts expected
• Increased investment from the public sector:
• Municipal finances
• Tax relief
• Infrastructure
• Regional differences in development
• Dependency on the oil industry is an important explanatory factor

March

MODERATE GROWTH IN THE NORWEGIAN ECONOMY

GROWTH FORECASTS FOR NORWAY HIGHLIGHTS

• A period of more moderate economic growth
• The GDP for mainland Norway is predicted to rise by roughly 1–1.5% in 2015 and 2016
• Continuing low interest rates, with further cuts expected
• Increased investment from the public sector
• Municipal finances
• Tax relief
• Infrastructure
• Regional differences in development
• Dependency on the oil industry is an important explanatory factor

HEADING FOR AN UPTURN

GROWTH FORECASTS FOR SWEDEN HIGHLIGHTS

• GDP growth is high, as expected:
• Growth rate of 2.5–3% this year and next year
• Record-low interest rates
• Positive development for households
• Improvements in the employment market
• Good growth in incomes and consumption
  • Households' confidence in the economy will nevertheless remain moderate

March

GROWTH FROM A LOW LEVEL

GROWTH FORECASTS FOR DENMARK HIGHLIGHTS

• The economic outlook is brighter than for many years
• GDP growth of 2% in 2015, may rise to 2.5% in 2016.
• House prices picking up in metropolitan areas
• May counteract imbalances in the wake of the financial crisis
• Housing wealth vs. level of debt in households
• Increased activity vs. overcapacity

Veidekke's new HQ in Skøyen

NORWEGIAN CONSTRUCTION MARKET: MODERATE FORECASTS, REGIONAL DIFFERENCES

INCREASING PRODUCTION

PRODUCTION INDEX FOR CONSTRUCTION HIGHLIGHTS

• The production index rose by 1% in Q2
• 1.5% more than in the same quarter in 2014
• Civil engineering: Production picked up sharply this year
• Up 5.2% from Q1 to Q2
• Building construction: Stable activity for residential and non-residential buildings
• Growth largely due to public non-residential buildings
• Private non-residential buildings declining slightly

NEW RESIDENTIAL AND CIVIL ENGINEERING PROJECTS

CONTINUED GOOD INFLOW OF NEW ORDERS

THE RESIDENTIAL MARKET: HOUSE PRICES ROSE MORE THAN EXPECTED

HOUSE PRICES HIGHLIGHTS

Dashed line = Veidekke's projection from March

• The residential market is still dominated by rising prices and stable sales
• Low interest rates and good access to credit
• People moving to metropolitan areas
• In August the price of existing apartments was around 4% higher than in January 2015
• The forecast of 5% growth in 2015 and 3% in 2016 remains unchanged
• The decline in the Norwegian economy and prospects of rising unemployment will affect price growth

WEAKER MARKET IN ROGALAND

DECLINING DEMAND FOR RESIDENTIAL BUILDINGS AND PRIVATE NON-RESIDENTIAL BUILDINGS IN ROGALAND

THE RESIDENTIAL MARKET: INCREASING REGIONAL DIFFERENCES

HOUSE PRICES AND TRENDS	HIGHLIGHTS

Source: Finn / Norwegian Real Estate Association (EFF)

• Continued good growth in prices in the Oslo and Bergen metropolitan areas
• Days on the Market (DOM) stable
• The situation in oil-dependent areas is pulling the residential market down
• Homes taking longer to sell

THE RESIDENTIAL MARKET: HOUSING STARTS

Dashed line = Veidekke's projection from March

REGISTERED RESIDENTIAL BUILDING PERMITS HIGHLIGHTS

• Strong growth in the number of housing starts in the first half of the year
• Good housing sales through the winter this year
• Work has started on projects that were put on ice in 2013–2014
• We expect a flatter development through the autumn and winter
• Around 30,000 housing starts in 2015
• Expected to decline to around 27,000 in 2016
• Areas dependent on the oil industry will see a sharp decline

REGIONAL DIFFERENCES IN HOUSING STARTS

SLOWER GROWTH WITHIN NON-RESIDENTIAL BUILDINGS

REGISTERED NON-RESIDENTIAL BUILDING PERMITS HIGHLIGHTS

• Start-up of non-residential buildings has been declining
• A growing number of new public building projects will stabilise start-up figures
• Construction projects for oil-related industries will fall
• Other private construction projects will stabilise
• Drivers for the start-up of non-residential buildings
• Private: Employment, interest rates and income trends
• Public: State and municipal finances, interest rates and centralisation

CIVIL ENGINEERING

INVESTMENTS IN CIVIL ENGINEERING (VOLUME 2011 PRICES) HIGHLIGHTS

• 5% growth in the civil engineering market this year and next year
• Transport continues to lead the growth in civil engineering
• The growth within municipal infrastructure will probably continue going forwards
• Development and upgrading of power plants continues to grow at 10–12% p.a.

Source: Statistics Norway and Veidekke * Annual growth rate 2015–2016 (Note "Other public" has passed "Power")

EXAMPLES OF MAJOR PROJECTS

• A number of major transport infrastructure projects will come up for tender in 2015–2016
• Relevant projects (worth more than NOK 500 million) total more than NOK 50 billion in Norway

CONSTRUCTION MARKETS IN NORWAY SUMMARY

• Continued high levels of activity in the construction and civil engineering market in 2015 and 2016
• Growth of around 2% in the total market
• Residential investments to rise by approx. 2% p.a.
• Private non-residential buildings falling, -2% p.a.
• 3% annual growth for public non-residential buildings
• Continued growth from a high level of activity within civil engineering

Brf Hovås Park, Gothenburg

SWEDISH CONSTRUCTION MARKET HIGH LEVELS OF ACTIVITY

CONSTRUCTION COMPANIES' CONFIDENCE INDICATOR

HOUSING STARTS HIGHLIGHTS

• Healthy market development so far in 2015
• The start-up rate has passed 40,000 units
• Price growth has picked up in the cities
• Positive underlying driving forces
• Improvements in the labour market
• Low interest rates greater purchasing power
• Growth projections for residential investments revised upwards to 15%
• Unchanged at 3% in 2016

HOUSE PRICES AND FORECASTS HIGHLIGHTS

• Healthy market development so far in 2015
• The start-up rate has passed 40,000 units

Price growth has picked up in the cities

• Positive underlying driving forces
• Improvements in the labour market
• Low interest rates greater purchasing power
• Growth projections for residential investments revised upwards to 15%
• Unchanged at 3% in 2016

Dashed line = Veidekke's projection from March

27

POPULATION. ANNUAL GROWTH (%) HIGHLIGHTS

• Healthy market development so far in 2015
• The start-up rate has passed 40,000 units
• Price growth has picked up in the cities
• Positive underlying driving forces
• Improvements in the labour market
• Low interest rates greater purchasing power
• Growth projections for residential investments revised upwards to 15%
• Unchanged at 3% in 2016

THE COST OF BUYING A HOME HIGHLIGHTS

• Healthy market development so far in 2015
• The start-up rate has passed 40,000 units
• Price growth has picked up in the cities
• Positive underlying driving forces
• Improvements in the labour market
• Low interest rates greater purchasing power
• Growth projections for residential investments revised upwards to 15%
• Unchanged at 3% in 2016

* Swedbank's housing affordability index ("Boindex"), which measures the purchasing power of households after housing expenditures. Index: 100 = good purchasing power, a higher score = greater purchasing power.

THE COST OF BUYING A HOME HIGHLIGHTS

• Healthy market development so far in 2015
• The start-up rate has passed 40,000 units
• Price growth has picked up in the cities
• Positive underlying driving forces
• Improvements in the labour market
• Low interest rates greater purchasing power
• Growth projections for residential investments revised upwards to 15% in 2015
• Unchanged at 3% in 2016

* Swedbank's housing affordability index ("Boindex"), which measures the purchasing power of households after housing expenditures. Index: 100 = good purchasing power, a higher score = greater purchasing power.

HIGHLIGHTS

• Moderately positive market development in 2015
• Investment figures show +4% in H1 2015, compared with H1 2014
• Industrial investment estimates for 2015 show solid growth
• However this trend is not reflected in the number of projects started
• The underlying driving forces indicate good prospects in 2016
• Unemployment fell by more than 1.5% in Q2
• Retail sales averaging 4% year-on-year
• The general economic situation entails increased demand for capacity
• The positive forecasts for the period remain unchanged
• 5% growth in 2015, rising to 7% in 2016

Pyramiden – SEB's new offices in Stockholm

INVESTMENTS IN CONSTRUCTION AND CIVIL ENGINEERING FOR A SAMPLE OF INDUSTRIES HIGHLIGHTS

Estimate from May the same year	2014	2015	Diff. %
Industrial	6.1 bill.	5.9 bill.	-3%
Shops	2.0 bill.	3.8 bill.	+80%
Industrial and storage	9.6 bill.	10.3 bill.	+7%
Commercial property development companies	30.3 bill.	39.0 bill.	+29%

Source: Statistics Sweden

• Moderately positive market development in 2015
• Investment figures show +4% in H1 2015, compared with H1 2014
• Industrial investment estimates for 2015 show solid growth
• However this trend is not reflected in the number of projects started
• The underlying driving forces indicate good prospects in 2016
• Unemployment fell by more than 1.5% in Q2
• Retail sales averaging 4% year-on-year
• The general economic situation entails increased demand for capacity
• The positive forecasts for the period remain unchanged
• 5% growth in 2015, rising to 7% in 2016

BUILDING PERMITS FOR PRIVATE NON-RESIDENTIAL BUILDINGS HIGHLIGHTS

• Moderately positive market development in 2015
• Investment figures show +4% in H1 2015, compared with H1 2014
• Industrial investment estimates for 2015 show solid growth
• However this trend is not reflected in the number of projects started
• The underlying driving forces indicate good prospects in 2016
• Unemployment fell by more than 1.5% in Q2
• Retail sales averaging 4% year-on-year
• The general economic situation entails increased demand for capacity
• The positive forecasts for the period remain unchanged
• 5% growth in 2015, rising to 7% in 2016

LABOUR MARKET HIGHLIGHTS

• Moderately positive market development in 2015
• Investment figures show +4% in H1 2015, compared with H1 2014
• Industrial investment estimates for 2015 show solid growth
• However this trend is not reflected in the number of projects started
• The underlying driving forces indicate good prospects in 2016
• Unemployment fell by more than 1.5% in Q2
• Retail sales averaging 4% year-on-year
• The general economic situation entails increased demand for capacity
• The positive forecasts for the period remain unchanged
• 5% growth in 2015, rising to 7% in 2016

LABOUR MARKET HIGHLIGHTS

• Moderately positive market development in 2015
• Investment figures show +4% in H1 2015, compared with H1 2014
• Industrial investment estimates for 2015 show solid growth
• …However this trend is not reflected in the number of projects started
• The underlying driving forces indicate good prospects in 2016
• Unemployment fell by more than 1.5% in Q2
• Retail sales averaging 4% year-on- year
• The general economic situation entails increased demand for capacity
• The positive forecasts for the period remain unchanged
• 5% growth in 2015, rising to 7% in 2016

PUBLIC NON-RESIDENTIAL BUILDINGS MORE MODERATE

Dashed line = Veidekke's projection from March

BUILDING PERMITS – PUBLIC NON-RESIDENTIAL BUILDINGS HIGHLIGHTS

• The predicted decline seems to be under way
• Decrease in building permits in H1 2015
• Investments in H1 2015 -4%
• Weak starting point for the rest of 2015 and 2016
• An extended period of growth is now behind us
• Cutbacks in several parts of the public sector
• The forecasts have been revised downwards for 2015 to 0% investment growth
• The forecast of decline of 5% in 2016 remains unchanged.

THE CIVIL ENGINEERING MARKET

INVESTMENTS IN CIVIL ENGINEERING (VOLUME 2011 PRICES) HIGHLIGHTS

Source: Statistics Sweden and Veidekke * Annual growth rate 2015–2016

• Positive market development in civil engineering in 2015
• Investment growth of 5% in H1 2015, compared with H1 2014
• Railway and power are positive drivers, road construction down
• Moderate forecast for civil engineering investments in 2015– 2016
• The extraction industry is being affected by weak commodity prices
• Municipal technical facilities are facing budget cuts
• The power sector is moderating its investment plans after many years of high investments
• Transport projects are increasing as a result of growth in railways
  • Moderate road investments in the period up to the end of 2016
• Forecast adjusted down to 2% for 2015
• Flat in 2016

THE CIVIL ENGINEERING MARKET

INVESTMENTS IN CIVIL ENGINEERING (VOLUME 2011 PRICES) HIGHLIGHTS

• Positive market development in civil engineering in 2015
• Investment growth of 5% in H1 2015, compared with H1 2014
• Railway and power are positive drivers, road construction down
• Moderate forecast for civil engineering investments in 2015– 2016
• The extraction industry is being affected by weak commodity prices
• Municipal technical facilities are facing budget cuts
• The power sector is moderating its investment plans after many years of high investments
• Transport projects are increasing as a result of growth in railways
  • Moderate road investments in the period up to the end of 2016
• Forecast adjusted down to 2% for 2015
• Flat in 2016

THE CIVIL ENGINEERING MARKET

INVESTMENTS IN CIVIL ENGINEERING (VOLUME 2011 PRICES) HIGHLIGHTS

Source: Statistics Sweden and Veidekke * Annual growth rate 2015–2016

• Positive market development in civil engineering in 2015
• Investment growth of 5% in H1 2015, compared with H1 2014
• Railway and power are positive drivers, road construction down
• Moderate forecast for civil engineering investments in 2015– 2016
• The extraction industry is being affected by weak commodity prices
• Municipal technical facilities are facing budget cuts
• The power sector is moderating its investment plans after many years of high investments
• Transport projects are increasing as a result of growth in railways
  • Moderate road investments in the period up to the end of 2016
• Forecast adjusted down to 2% for 2015
• Flat in 2016

CONSTRUCTION MARKETS IN SWEDEN SUMMARY

INVESTMENTS IN CONSTRUCTION (VOLUME 2011 PRICES) HIGHLIGHTS

Source: Statistics Sweden and Veidekke * Annual growth rate 2015–2016

• Swedish market expected to remain strong throughout the forecast period
• Investment growth of 7% in 2015 and 3% in 2016
• The private sector is the main driver in 2015–2016
• Residential market +9%
• Private sector non-residential buildings +6%
• Moderate growth in public sector demand
• Public sector non-residential buildings down 3%
• Moderate growth in transport projects in the period, but with major regional projects in start-up phase

Frederiksberg Centret

DANISH CONSTRUCTION MARKET CONSTRUCTION SECTOR REMAINS WEAK

PRIVATE NON-RESIDENTIAL BUILDINGS – GROWTH FROM A LOW LEVEL

PRIVATE NON-RESIDENTIAL BUILDINGS HIGHLIGHTS

• The general economic recovery has not yet impacted construction and civil engineering
• The decline is continuing in the market for private nonresidential buildings
• Still a high level of vacancies, especially offices, which must be absorbed before new dynamics can be created
• The growth forecast for investments has been downgraded
• Adjusted down to 0% for 2015 due to weak performance so far this year. Unchanged at 10% growth for 2016
• Despite some growth in 2016, the market will continue to be demanding throughout the forecast period

DENMARK – CONSTRUCTION SECTOR REMAINS WEAK

Source: Statistics Denmark and Veidekke * Annual growth rate 2015–2016

INVESTMENTS IN CONSTRUCTION. FIXED PRICES (DKK) HIGHLIGHTS

• Still some markets with very low activity
• The private segment is expected to pick up slightly in 2016 due to a general improvement in the economy
• Forecast for 2015 adjusted down due to weak performance so far this year
• Public sector segments within civil engineering and nonresidential buildings are expected to decline in the period due to the need for budget cutbacks

SUMMARY

SCANDINAVIAN CONSTRUCTION MARKET TOWARDS

Investments in construction, NOK billion* 2011 prices (volume)

Source: Veidekke, Statistics Sweden, Statistics Denmark and Statistics Norway

* Exchange rates for Q2 2015

** Compound annual growth rate (CAGR) in 2015–2016

APPENDIX

FORECASTS

	Level 2013 BNOK	2014 Growth	2015 Growth	2016 Growth	Growth rate 15–16
Residential	114	-5%	3%	1%	2%
Private non-res.	50	5%	-2%	-1%	-2%
Public non-res.	25	5%	3%	3%	3%
Civil engineering	59	6%	6%	5%	5%
Constr. total	248	1%	3%	2%	2%
	2013	2014	2015	2016
Number of units	29 000	27 000	30 000	27 000
Legend: Unchanged forecast Adjusted down / up

FORECASTS

	Level BSEK 2013	2014 Growth	2015 Growth	2016 Growth	Growth rate 15–16
Residential	97	20%	15%	3%	9%
Private non-res.	73	12%	5%	7%	6%
Public non-res.	32	13%	0%	-5%	-3%
Civil engineering	67	7%	2%	1%	1%
Constr. total	269	14%	7%	3%	5%
	2013	2014	2015	2016
Number of units	30 000	39 000	40 000	40 000
Legend: Unchanged forecast Adjusted down / up

Source: Statistics Sweden and Veidekke

FORECASTS

	Level 2013 BDKK	2014 Growth	2015 Growth	2016 Growth	Growth rate 15–16
Residential	47	9%	0%	10%	5%
Private non-res.	17	-4%	0%	10%	5%
Public non-res.	17	-3%	-5%	0%	-3%
Civil engineering	32	8%	-5%	0%	-3%
Constr. total	112	5%	-2%	6%	2%

Legend: Unchanged forecast Adjusted down / up

Source: Statistics Denmark and Veidekke